Guest post by Chip Brackley, Archetype Wealth Advisors
How are your New Year’s resolutions holding up? Maybe you’ve been faithful and have kept every one of them, or maybe you now just realized you have no idea where the notebook is that you wrote them down on. Either way, it’s never a bad time to take a peek, re-adjust and possibly add a new objective to the mix.
To that end, here’s a couple to consider adding to your resolution list: How would you like to pay less in taxes this year? How would you like to be more generous?
Whether these made your original Top 10 list or not, they are worthy goals to have. And I’m going to walk you through a few practical ways to help you pay less in taxes, be more generous, and possibly save more money than you thought you could.
HAVE A PLAN: IF YOU HAVE A PLAN YOU WILL BECOME A MORE EFFECTIVE GIVER
When it comes to giving, if you want to make the greatest impact, then you need to have a plan…three plans actually:
- A plan for HOW MUCH you want to give
- A plan for WHO you want to give to
- A plan for WHAT you should give
Since the goal of this article is to help you save on taxes and give more money away, I’m going to focus on the last plan: what you should give. But first, a couple quick freebies on the first two.
A plan for HOW MUCH you want to give
Having a plan for how much you want to give means you are being purposeful. It also means you will probably give away that amount of money, and maybe even more. Think in terms of percentages. If you decide to give away a percentage of your income and you make more money than expected, your giving amount automatically goes up.
Having a plan for how much you want to give enables you to be purposeful with your giving.
A plan for WHO you want to give to
A challenge many generous families face is learning how to say “No” to organizations seeking support. But if you decide what’s important to you and your family ahead of time, you’ll have a plan that enables you to say “No” with confidence.
Additionally, when you have a plan for who you want to give to, come tax time you won’t be scrambling to find donation receipts. We see many families support their passions by going deep with a few organizations so they can make a measurable difference. And remember, don’t just give money, but give your talent and time as well. All three are needed!
A plan for WHAT you should give
Nearly 90% of donations are made in cash. And while cash might be king, its often the least productive asset to give.
When giving, think in terms of your income AND balance sheet. Including your balance sheet in the mix allows you to consider giving from a variety of different sources. For example, in almost all cases it is better to give long-term appreciated assets rather than cash. It’s ironic that 90% of giving is done in cash, BUT 80% of the average person’s net worth is tied up in assets other than cash. So, if cash is a limited resource and the least tax efficient asset to give, doesn’t it make sense to explore other options on what to give?
Before you write that check, take a look at your balance sheet (insert a link with our balance sheet) for appreciated assets that you might be able to give. Examples of appreciated assets are stocks or mutual funds with large gains. It can also include illiquid assets like business interests or real estate.
Let’s take a look at some examples for each of these….
Scenario 1: Giving Appreciated Stock/Investments
Say you own shares of Apple which you bought years ago for a cost basis of $10,000 and the current value is $100,000. Congratulations, you have a $90,000 gain. But if you sell the position you would owe tax on that significant gain. Simplistically, in this example you would end up with approximately $75,000 after taxes are paid. And that’s exactly what many people do: Sell the appreciated position and donate proceeds.
By contrast, if you were to give away the stock before selling it, you could give away the full $100,000 and not owe any taxes on it. And you would receive the full market value of the donation as a tax deduction. In this scenario, you pay less taxes and give away more money – sounds like a win-win to me!
Too many times people will hold onto appreciated assets well past the time they should because they don’t want to pay taxes. Leveraging those assets as a part of your regular giving is a great way to get around this and realize greater tax savings.
After all, who wouldn’t love to redirect tax dollars towards charitable causes?
Scenario 2: Giving Business Interests
For many people, wealth is created through building a business. Whether you are a business owner or employee who has been granted ownership through shares, a large part of your net worth is probably tied up in the business. That’s not a bad thing, but it does mean that part of your personal net worth is illiquid. Liquidity typically comes when the business is sold or goes public, and with this liquidity you finally get a chance to give off of this portion of your wealth. So instead of giving money after the business is sold, where taxes have already been paid, you should consider giving prior to the sale.
Let’s take a look at another example. Say your business is going to sell and you are going to receive $1,000,000. Your goal is to give 10% or $100,000 of the proceeds to charity. Instead of receiving all of the proceeds in cash and paying taxes on the full amount, you could put 10% of your business/shares into a Donor Advised Fund (more on these below) before the transaction happens. By doing this, you will be able to give away the full $100,000 without paying any taxes on that portion of the sale. Again, another win-win situation – give more and pay less in taxes!
Scenario 3: Giving Appreciated Real Estate
Much like in the example above, real estate is another great way to create wealth. But due to its illiquid nature, most people never think to give away this portion of their net worth. Whether you own a single or multifamily rental property, office space or raw land, placing all or part of these long-term investments into a donor advised fund might be a great opportunity to give and save taxes. You can give the entire property or, if you own the property in an LLC or LLP, you can donate a percentage of the entity that owns the real estate.
Donor Advised Fund
What makes a lot of this illiquid giving possible? Donor Advised Funds
In legal terms, a Donor Advised Fund (DAF) is a charitable giving vehicle administered by a public charity created to manage charitable donations on behalf of organizations, families or individuals.
In laymen’s terms, a DAF is like a charitable investment account, which can receive assets today that you can direct to the charities of your choosing at a later date. Some benefits include:
- DAFs can handle different types of asset contributions, including illiquid investments as discussed above
- DAFs make it easy for the charities you support to receive your donation
- You can invest and grow your donation tax free
- You can give anonymously from your DAF
- You receive favorable tax deductions the year you give, but can donate the proceeds at a later date
- You receive one tax form for all of your giving for the year
So, what’s next? If this inspired you, I encourage to dust off your 2021 resolutions and add “give more / save on taxes” to the top of the list. Then take a look at your balance sheet to see what assets might be used to make 2021 your most generous year yet. Need some help or have more questions on what I outlined above? Give us a call.
As a company, we love helping families unlock generosity. Just this past year, we helped our clients donate over $100 million in charitable assets, the bulk of which utilized one of the scenarios above. Have a blessed start to the New Year!
Chip Brackley is a wealth advisor and director at Archetype Wealth partners. He is passionate about helping families experience greater clarity and contentment by connecting their wealth with their purpose. The alignment of wealth and purpose positions families for greater success and guides the stewardship of their wealth for generations to come. Learn more at his website or reach him directly by calling 404.689.7410 or emailing firstname.lastname@example.org.